Business, general

A liquidity cost argument is used to partly explain the price responses of stock.The argument is based on the rights offers case of RS Hansen in 1988. Accordingto Hansen, rights offers create portfolio imbalances for current shareholders. These imbalances are rectified by sales of new shares. Added costs in the marketing of new shares results from the temporary lowering of prices that is attributed to strong pressures to sell. This presents a dilemma in terms of establishing the cost effectiveness of rights offerings over general cash offers. A similar explanation is supplied for the case of convertible bond calls and preferred stock calls, such that calls of both types of securities produce announcements that are markedly negative regardless of the selected estimation period.

The management of corporations involved in proposed acquisitions do not perceive movements in the common stock prices of the organizations that they manage as useful information when determining the advisability of acquisition proposals. There is no association between bidder management behavior actually performed and the behavior that would be expected if the management found the securities market's opinion of the acquisition proposal informative. There is no evidence to support the hypothesis that a belief held by bidder management that its information is superior to market information explains bidder actions in acquisition activity. The motivation to acquire corporations appears to be something other than increasing bidder shareholder wealth.

On the information content of calls of convertible securities

Article Abstract:

A recent study extends the findings of Mazzeo and Moore (1992) by examining the information content of calls of convertible bonds and preferred stocks. The 1992 paper showed that the impact of such announcements are not permanent. The present study demonstrates that stock prices regain the full amount lost in value when an announcement is made at the end of the conversion period. Therefore, the negative announcement effect is transitory in nature, debunking explanations based on information signaling. In addition, it finds that Value Line analysts change their long-term and short-term earnings forecast upward after call announcements, also inconsistent with explanations based on information signaling.